Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Under an antitrust consent decree, petitioner New Blue Chip was required to offer a substantial number of common stock shares in its new trading stamp business to retailers like respondent which had previously used the stamp service but which were not shareholders in petitioner’s corporate predecessor. Charging that New Blue Chip and other petitioners devised a scheme to dissuade the offerees by means of materially misleading statements containing an overly pessimistic appraisal of the new business from purchasing the securities so that the rejected shares might later be offered to the public at a higher price, respondent brought this class action for damages for violation of the provisions of § 10(b) of the Securities Exchange Act of 1934 (Act) and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (SEC), which make it unlawful to use deceptive devices or make misleading statements "in connection with the purchase or sale of any security." Acting on the basis of the rule enunciated in 1952 in Birnbaum v. Newport Steel Corp., 193 F.2d 461, which states that a person who is neither a purchaser nor a seller of securities may not bring an action under § 10(b) of the Act or the SEC’s Rule 10b-5, the District Court dismissed respondent’s complaint. The Court of Appeals reversed, concluding that the facts warranted an exception to the Birnbaum rule. The court noted that prior cases had held that the rule did not exclude persons owning contractual rights to buy or sell securities, and that the offering of securities in this case in compliance with the antitrust decree served the same function as a securities purchase or sales contract.

Held: A private damages action under Rule 10b-5 is confined to actual purchasers or sellers of securities, and the Birnbaum rule bars respondent from maintaining this suit. Pp. 731-755.

(a) The longstanding judicial acceptance of the rule, together with Congress’ failure to reject its interpretation of § 10(b) argues significantly in favor of this Court’s acceptance of the rule. P. 733.

(b) Evidence from the texts of the Act and the Securities Act of 1933 supports the Birnbaum rule. When Congress wished to provide statutory remedies to others than purchasers or sellers of securities, it did so expressly. Pp. 733-736.

(c) Policy considerations predominantly favor adherence to the rule. Failure to follow it could well result in vexatious litigation caused by a widely expanded class of plaintiffs bringing "strike" suits under Rule 10b-5 and opening litigation to hazy factual issues the proof of which would largely depend on uncorroborated oral testimony to the effect that a person situated like respondent consulted the security issuer’s prospectus, and paid attention to it, and that its representations injured him. Pp. 737-749.

(d) Respondent, who derives no entitlement from the antitrust decree and does not otherwise possess any contractual rights relating to the offered stock, occupies the same position as any other disappointed offeree of stock registered under the 1933 Act who claims that an overly pessimistic prospectus has caused him to pass up the chance to purchase, and there is ample evidence that Congress did not intend to extend a private cause of action for money damages to the nonpurchasing offeree of stock registered under the 1933 Act for loss of the opportunity to purchase due to an overly pessimistic prospectus. Pp. 749-754.

(e) The exception to the Birnbaum rule that the Court of Appeals relied upon would expose the rule to case-by-case erosion depending upon whether a particular group of plaintiffs was deemed more discrete than potential purchasers in general so as to warrant departing from the rule, and would result in an unsatisfactory basis for establishing liability for the conduct of business transactions. Pp. 754-755.

492 F.2d 136, reversed.

REHNQUIST, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, WHITE, MARSHALL, and POWELL, JJ., joined. POWELL, J., filed a concurring opinion, in which STEWART and MARSHALL, JJ., joined, post, p. 755. BLACKMUN, J., filed a dissenting opinion, in which DOUGLAS and BRENNAN, JJ., joined, post, p. 761.